Achieving growth of SME lending by harnessing digital customer data

Over the last few years the commercial lending industry has undergone considerable change. The number of small and medium enterprises (SMEs) in the UK is growing rapidly and so is competition to provide them with finance. As such, lenders of all shapes and sizes are digitising their operations to gain a competitive advantage.

Planning and executing a digital strategy for the SME market can be challenging, with varying budgets, resources and expertise available to lenders. Equally the prioritisation of digital data assets to utilise in support of this strategy can also be a complex arena.

Critically, we must remember that an organisation’s data strategy is there to serve the overall business strategy. The choice of which data assets to use, how to access them, and which processes should be automated, has to be in support of the business goals. It is only in this context that a true digital transformation can successfully happen. The data then becomes a real driver of value, rather than a “nice to have” add-on.

We’ve identified four key factors that are motivating SME lenders and shaping the wider industry:

Customer loyalty – what does loyalty mean in today’s world, and what drives it?

Regulation – in particular, how are lenders reacting to regulatory change and what impact does this have on their processes?

The role of the digitally enabled lender – what does this mean for the lender/client relationship and engagement model? And what are the new responsibilities of the lenders?

Growth rate of the SME market – now a central focus of lenders and regulators. As this market continues to expand, how can lenders support SMEs adequately and successfully?

These factors all demand attention and consideration when forming a digital strategy. And yet, regardless of approach, lenders need data. It all begins with data.

Understanding management accounts data

The prioritisation, approval, and implementation of enhanced data assets is a well-documented challenge. With a wide array of options, it makes sense to utilise what is readily available. Management accounts data is an accurate and insightful data set. When integrated it can help power lending decisions, drive process efficiencies and mitigate portfolio risk.

There is nothing new in exploring SME’s detailed financial data, but it’s only with recent technological advances that granular management accounts data can be made fully available to support a lender’s engagement with their customers in practically real time. Management accounts data is available, accessible, reliable and extremely valuable. It is the natural first place to look when evaluating new data sources to support a modern SME lending business.

Powering decisions

The daily decisions and transactions a small business makes can reveal a lot about their reliability for lenders. And there’s no better way to determine reliability, or default probability, than analysing management accounts data.

We’ve identified some key questions that can be answered using management accounts data:

P&L – what size/type/frequency of income is the company generating? Where/how does the company spend its money? What is the company’s payroll activity like? How does all of this change over time?

Debtors and business customers – who are the company’s business customers? How concentrated are these customers? How quickly do these customers pay the company and does it vary by customer type?

Quality and financial behaviour – is the company fulfilling financial duties in a timely manner? Is the company making best use of their accounting tool? Are there any mismatches on the accounts?

Company viability – are current assets sufficient to meet short term liabilities? Are cash flow trends healthy? How are creditor days vs debtor days?

The main benefit of management accounts data is that it is black and white – it is objective and very hard to misinterpret which means a fair process for both lender and borrower.

Using management accounts data in practice

Management accounts data can reveal a lot about the way a company’s finance department is run, providing an invaluable insight into the day to day management of the business the Lender is deciding whether to financially support or not.

Let’s have a look at two scenarios.

Nina is the financial controller of an SME. The business is small, very young and perhaps not an ideal loan candidate. Closer inspection of the management accounts however, indicates that Nina runs an extremely tight ship – all payments and business transactions are executed on time, cashflow is positive and the finance department is run with clear structure and organisation.

John is the financial controller for another SME. From the outside, John’s company looks like a worthy candidate for financial support: it’s larger and more established than where Nina works. However, closer inspection of the management accounts data indicates that John is disorganised and runs the company’s day to day financial transactions with very little structure or regularity.

In both scenarios, the management accounts data provides a level of insight that simply looking at a company on paper: turnover, size etc could never tell you. Nina’s company may be the riskier loan candidate according to Companies House (UK’s registrar of companies), but on closer inspection of the management accounts, an underwriter would perhaps be much warier of initiating a business relationship with John.

It all begins with data

Modern technological advances are changing the way lenders service the SME market. Innovation, particularly around access to enhance data assets, is improving processes and reducing the risk associated with lending to a historically challenging portion of the market.

While organisations scramble to demystify the SME through complex analysis and clever algorithms, such as collating unstructured data, there are data sets available today that offer granular insight that can inform decision making.

Management accounts is one such data set. It is readily available, easily accessible, and extremely reliable (when shared from source) and should be considered as part of any wider digital strategy within the lending space.

Validis is a London-based fintech and the developer of DataShare, a secure data extraction and standardisation solution used by banks and alternative finance providers to optimise their SME lending processes.

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